For several years we have been voicing our concerns over a tide of issues facing the oil majors; firstly it seems that their oil production has peaked, then one year ago we noted that the spiraling capital expenditure was unsustainable – some will remember that the likelihood of 'Capex Compression' was the subject of our first 'DW Monday'. And it is now happening. Hess's 2014 spend is to be 30% lower than that of two years earlier, Shell is reducing by 20% compared to 2013, BG's is also set to fall and BP's Bob Dudley has stressed the importance of "capital discipline".
The upstream spend of the publicly listed international oil majors totaled about $270bn in 2013, approximately one-third of industry upstream spend. If we project the trajectory of Shell to the other IOCs then we might expect their Capex to fall by 20% over the next two or three years. This would equate to about 7% of the total industry's annual upstream Capex. The brunt is likely to be felt in the high Capex segment, notably in arctic, deepwater and LNG projects, reflected in our forecasts being somewhat more conservative than other firms.
However, there is the other 93% of Capex to go for, possibly in excess of $650bn in 2014. There are two other important groups of players in the game – the highly innovative smaller independent oil companies responsible for the surging onshore production of oil & gas from the US shales and at the other end of the scale the national oil companies such as Saudi Aramco. The NOCs are typically characterised by long-term spending programmes, and commit to long contracts for equipment and services. The NOCs are in the main continuing their spend – as we will show in a later edition, they are having to drill more and more holes for less and less oil. Indeed, in the latest Barclay's Capital industry survey, the NOC's expected their spend to grow at some 11%.
So what of the impact on the oilfield services companies? The cutback in high Capex projects will impact on the unprepared and those who do not have diversified offerings and client base. But all downturns bring major opportunities for well financed companies able to take the long term view – oil & gas is not a short-term business. Indeed, our research in Middle East tells us that the process of becoming an accepted vendor to NOCs such as Saudi Aramco can take several years.
Finally it must be remembered that E&P is not just Capex – the oil and gas must be kept flowing and the associated maintenance, modifications and operations (MMO) spend keeps slowly ramping upwards.
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